Wednesday, December 29, 2010

Joseph Stiglitz Repudiates the Invisible Hand, but Accepts the Myth of Adam Smith's Culpability in Promoting It

A short video of Joseph Stiglitz declaiming the modern version of Adam Smith’s alleged ‘doctrine’ of the ‘invisible hand’ is available HERE

‘Joseph Stiglitz Against Adam Smith's Invisible Hand’

“Nobel Prize winner Joseph Stiglitz challenges the influential teachings of 18th-century economist Adam Smith, citing flaws with Smith's metaphor of an "invisible hand" guiding the free market. "The reason the invisible hand often seemed invisible was that it wasn't there," he says. Stiglitz claims an uncritical adherence to Smith's ideas is partially to blame for the current financial crisis.”

CommentStiglitz’s declamation takes the view that the modern teaching of “almost every graduate school in the country’ is wrong, because the ‘invisible hand’ is ‘not there’, which leaves Adam Smith lumbered with what was a modern invention (see Paul Samuelson, Economics: an introductory analysis, p 36, McGraw-Hill, 1948) that is not supported by the Smith’s texts, not just by a nuance, but by being quire contrary to anything Smith wrote.

Stiglitz argues that the claim that modern markets do not support the modern assertions and the evidence exposes the fallacy that they do, and yet he still lumbers Adam Smith with the authority for the claims made in his name.

The fact is, Adam Smith is wholly innocent. That he was ‘wrong’ in some way is a ludicrous claim; the guilty parties are all those lemming-like economists who repeat the charge of Smith’s “error”, but who have never bothered to read Adam Smith’s use of the metaphor of an invisible hand on the three occasions only that he used it. In none of these uses was he referring to anything remotely related to ‘perfect competition’. The edifice collapses on the evidence, yet very bright minds believe the contrary.

He referred in Astronomy to credulous Romans who believed that the God Jupiter fired thunder bolts in his anger (Smith called it ‘pusillanimous superstition’; In Moral Sentiments he referred to rich warlord/feudal landowners, not markets, and in Wealth Of Nations he referred to some, but not all, merchants in mercantile Britain, who preferred the relative ‘safety’ of a tariff-ridden, outright prohibitionist, mercantile monopoly of Guilds, the Apprentice Statutes, the Settlement Acts, and Chartered-venturer Britain to risking their capital abroad (protected by the Navigation Acts, policed by the Royal Navy) .

If you could ever get further from competitive markets, I cannot think of what it would look like, short of total State communism. And despite all this, modern economists read into Smith the 'First Welfare Theorem' and 'General Equilibrium'!

Not since astrology and alchemy ran through and alongside natural science has a discipline claiming to be science (in this case modern economics) promoted such a crass error and called it scientific.

3 Comments:

Although I've tears in my eyes that someone thinks Donald Boudreauxs blog Café Hayek is entertaining and educational I will alert my friend Peter Radford that his latest post on Smith’s Curse is wrong in one important respect.

PS: Boudreauxs letters are far from brilliant and only annoying. This whole Austrian Voodoo economics is depressing.

Follow-up to my previous post. I sent an one line email to Peter: Hmmm ... The ONE and almost ONLY point on economics I agree with Gavin Kennedy is that Adam Smith is wholly innocent. See Adam Smith's Lost Legacy. Cheers, Stephan

Reply from Peter: And I agree with that. Smith is not responsible for the way in which economists have subsequently taken his metaphor and tried to make it the central principle of their thinking.

BTW: I think it would be a real good idea if you publish your knowledge on Adam Smith on the Real-World Economics Blog. Peter regularly publishes there and a lot of students worldwide are reading the blog.

PS: All the other nonsense you are writing about like Austrian economics and how Great these Adam Smith Institute "scholars" are is your private party ;-) No need to publish this comment. But I've no email thus this is the only way to reach you.